Countries engaging in currency wars?

By Economics Monitor

Nov 25, 2014 11:02 AM EST

Major world economies are confronted with similar problem of low inflation and the poor growth rate. The central banks have been undertaking unconventional monetary policy measures to tackle the situation.

The Bank of Japan announced aggressive easing of its monetary policy last month; People’s Bank of China announced lowering of its benchmark interest rates last week, the European Central Bank is currently purchasing covered bonds and ABS to increase the flow of credit to companies.

The interest rates in these countries are at the rock bottom. Here is a look at the interest rates of major countries-

  • Fed: 0.25%
  • BoE: 0.5%
  • BOJ: 0.1%
  • PBOC: 5.6%
  • ECB: 0.05%

Yet the central banks are finding it difficult to boost growth by increasing domestic demand and hence the need to depend upon foreign demand. The progressive rate cuts and monetary easing measures have led to massive falls in these currencies thereby helping these countries to increase exports.

With one country devaluing its currency, others are forced to follow suit. Yen sank to a seven-year low against the US dollar in November, euro fell to 14-month low in September after ECB cut its benchmark rate to 0.05 and announced additional stimulus and the GBP has been consistently falling against the US dollar for the past few months now.

For the US economy, the story is quite different. The US dollar has been rising against almost all major currencies. The economy seems to be recovering and unemployment is falling back towards trend levels. The US Federal Reserve is likely to hike interest rate around mid-2015.

In the G20 meeting held last year in February, G20 finance ministers said, “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes.”

Given the present circumstances, it is highly likely that the next G20 meeting will be centred on currency devaluations and it will be interesting to see what the G20 finance ministers will say in the next meeting.

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